ARTICLE | January 10, 2025

A trust is a fiduciary relationship created by an individual (trustor) in which one person (the trustee) holds assets (in a separate legal entity) for the benefit of another (the beneficiary). There are two types of beneficiaries (income & remainder) and they can be the same or different individuals. This document will help you understand four of the most common trusts.

Revocable Living Trusts (RLT)

• Established and funded during the trustor’s lifetime.
• Can be revoked at any time.
• The trustor is typically his/her own trustee.
• All assets of the trustor should be titled into the name of the trust (with a few exceptions).
• Does not file its own tax return during the lifetime of the trustor.
• Used for estate planning purposes to act as a Last Will & Testament substitute because it avoids the probate process (court oversight process to see that the will is followed); adds privacy; and allows the successor trustee to handle the trust’s affairs in the event of incapacity without a power of attorney.

Why RLTs Aren’t as Prevalent in Whatcom County and Washington State in General

The probate process is streamlined and not costly or lengthy compared to costs to establish theRLT. Additionally, If the trustor is not diligent about titling assets, then upon the death of the trustor, we need to administer an estate probate (for assets owned in personal name) and administer the trust (for assets owned in trust name) which typically creates additional cost.

When RLTs Are the Most Beneficial

When there are assets in multiple states (to avoid probate processes in multiple states) and when
there are assets in California (to avoid statutory probate fees).

Testamentary Spendthrift Trust for Children

• Funded upon the death of the trustor with terms laid out in the Last Will & Testament.
• Choice of trustee is critical and does not necessarily need to be the same person as the guardian for minor children.
• The beneficiary child cannot sell his/her interest in the trust to someone else.
• Parent should give clear guidance to the trustee on distributions to the beneficiary or to the guardian. (How often? How much? For what purpose?)

When Testamentary Spendthrift Trusts are Beneficial

These trusts can be used for children if the parent does not feel it appropriate for them to receive their inheritance all at one time.

Testamentary Bypass Trust for Surviving Spouse

Funded upon the death of the first spouse to die in a married relationship with terms laid out in the Last Will & Testament.

Designates a defined amount to be placed in trust for access by surviving spouse (income beneficiary), but ultimately will pass to others, typically children (remainder beneficiaries), upon the death of the surviving spouse.

When a Bypass Trust is Most Appropriate

These trusts can save estate taxes by bypassing the taxable estate of the surviving spouse. They also can provide an income to a second spouse, and ultimately pass assets to children from a first spouse.

They also protect against the surviving spouse getting re- married and giving everything to the “new” spouse

Irrevocable Life Insurance Trust

• Established during lifetime via a separate trust agreement to hold a life insurance policy.
• Keeps life insurance proceeds out of your taxable estate and only beneficial if your estate will be subject to estate tax.
• Trustor cannot be trustee, and trustee must be a non- relative of the insured party.
• Trustor gifts cash into the trust annually to pay annual life insurance premiums.
• Beneficiaries must be provided with ability to withdraw gift when made (Crummey power) to qualify for annual gift exclusion.
• Caution must be taken to avoid any “incidents of ownership” by the insured to avoid IRS arguing inclusion in the taxable estate.

If you are interested in discussing the impact a trust may have state, please give us a call.